For those who complain that America’s federal income tax system is too complex, take heart.
There are fewer changes for the 2012 tax filing season than 2011, and 2011 didn’t contain many changes either.
Whether it’s because of the fragile economy, gridlock in the nation’s capital, or just plain common sense, there’s only a handful of things that taxpayers need take note of as they prepare for the upcoming April 15 tax filing deadline.
“There really weren’t many changes,” said tax attorney Chuck Mira, a partner with the firm of Mira + Kolena. “We had a lot of suspense with what went on with the ‘fiscal cliff.’ And that led them to put in the [Alternative Minimum Tax] extenders that helped quite a bit. A lot of taxpayers were going to be in trouble with the AMT, and they didn’t know it,” Mr. Mira said.
But in terms of changes that affect the tax returns that most people will file in the next month with the Internal Revenue Service, they were few in number.
“Congress just did sort of kick the can down the road. What was there in 2011, they let carry over to 2012 and 2013,” said Chuck Kissling, a certified public accountant and co-owner of Tucker, Kissling & Associates. “As far as specific things that people should be on the lookout for, all the things that were available for 2011 are still available for 2012.”
The standard deduction for those who don’t itemize their taxes increased for singles or marrieds filing separately by $150 to $5,950, and for married taxpayers filling jointly by $350 to $11,950. The deduction for the head of a household rose by $200 to $8,700. Personal and dependent exemptions have risen by $100 to $3,800, with most taxpayers able to take personal exemptions for themselves and an additional exemption for each eligible dependent.
Optional standard mileage rates, which are used to calculate the deductible costs of operating a vehicle for business, charitable, medical, or moving purposes, rose to 55.5 cents in mid-2011 and remained at that rate throughout 2012. The rate for medical or moving purposes decreased by a half-cent to 23 cents per mile for 2012, while the rate for driving in service of charities remained at 14 cents a mile.
The stimulus package in 2009 included many useful and specific tax credits to help taxpayers. But most of those helpful credits have expired or were removed.
Still, there were a few specific credits in 2012 that some taxpayers will find useful.
The so-called “Saver’s Credit” provides a credit of $1,000 ($2,000 for couples filing jointly) for taxpayers who voluntarily contribute to a sanctioned retirement account, such as an IRA, 401(k), or other work-place retirement account. The credit, designed for low and moderate-income workers, is limited to taxpayers whose 2012 adjusted gross income was no more than $57,500 for marrieds filing jointly, $28,750 for singles or marrieds filing separately, or $43,125 for the head of a household.
The credit helps offset part of the first $2,000 workers voluntarily contribute to their retirement accounts. Also, the IRS gives eligible taxpayers until April 15 to set up a new individual retirement arrangement or add money to an existing IRA and still get credit on their 2012 return.
Last year was to be the final year for the American Opportunity Tax Credit, which helps offset college costs. But the credit was extended to 2017 and now uses a redesigned Form 8863 to better verify a student’s eligibility.
For the eco-minded, the tax code continues to offer a Plug-in Electric Drive Vehicle Credit. First offered in 2008, it was modified for 2012 to include select two or three-wheeled electric scooters and tri-wheel vehicles. For most of the better-known electric cars, the credit is $7,500. For others the limit is $2,500.
Some additional taxes kicked in at the end of the year for higher-income people, and a new higher tax bracket for those earning over $400,000 annually.
Starting Jan. 1, some taxpayers are subject to a new Additional Medicare Tax of 0.9 percent if their income exceeds $200,000 for singles or heads of households, $125,000 for marrieds filing separately or $250,000 for marrieds filing jointly. An employer must withhold the Additional Medicare Tax from wages it pays to an individual in excess of $200,000 in a calendar year.
Another new tax that began Jan. 1 is the Net Investment Income Tax that imposes a 3.8 percent tax on income derived from bonds, stocks, mutual funds, loans, and other investments; capital gains dividends from mutual funds, and gains from the sale of stocks, bonds, mutual funds, and investment real estate. The tax applies to those who have net investment income plus adjusted gross incomes of $200,000 for singles or heads of households, $125,000 for marrieds filing separately, and $250,000 for marrieds filing jointly.
As part of President Obama’s promise to increase taxes on the wealthy, a new tax bracket of 39.6 percent has been established for singles with incomes over $400,000, heads of households with incomes over $425,000, marrieds filing separately with incomes over $225,000, and marrieds filing jointly with incomes over $450,000.
And the tax rate for capital gains and dividends, which was 15 percent in both 2011 and 2012, is now at 20 percent as of Jan. 1.
Mr. Kissling said there’s a host of new issues that high income earners didn’t have to face previously but must deal with fairly quickly if they want to minimize their tax bill during next year’s tax filing season.
“You’re going to have some tax issues to deal with in 2013 that you didn’t have to deal with before, but what people’s responses are to those issues and what they choose to do is still uncertain. The rules are the rules, naturally, and you’re going to have to follow them. And to the extent we can plan for the future to avoid those additional taxes, we will,” Mr. Kissling said.
“You’re going to want to avoid situations where you spike your income, and it may mean postponing some deductions,” he said.
“Currently people are still focused on just gathering their data for the 2012 year. But these issues will be coming to the forefront very soon,” Mr. Kissling added.
While the tax code itself did not change much in 2012, many of the forms used for filing taxes this season did change, creating a delay in when the IRS started accepting filed tax returns for processing.
It was only Monday that the IRS announced that it had updated its tax-processing systems to allow all remaining individuals and business taxpayers to file their returns. The IRS had been accepting 2012 returns in phases, starting Jan. 30, while it updated various forms and instructions to comply with late changes made by Congress. Taxpayers whose returns utilized forms in the process of being updated, such as Form 5695, which governs residential-energy credits, had to wait until Monday to file.
“The thing that complicated matters is they just came out last week and said all the forms are finally ready. That put us a little bit behind the eight ball,” Mr. Mira said.
Mr. Mira said that in addition to updating its forms, the IRS has become more focused on detecting fraud, and as a result is requiring additional documentation on some tax credits that it did not require previously.
“There is more and more emphasis on validating charitable deductions,” he said. “Every charitable deduction you have has to have a validating letter. They can now disallow the deduction even if you have a canceled check with the deduction, and I’ve seen them come in and do it because there’s a lot of fraud in that area.”
Besides charitable deductions, the IRS also is cracking down on the Earned Income Tax Credit, a popular credit designed to help low-to-moderate income earners.
Starting in 2011, tax preparers had to fill out a four-page document, Form 8867, declaring the filer eligible for the Earned Income Tax Credit, which is a refundable tax credit for low to moderate-income working people. Those not using Form 8867 can be fined $100 to $500 if the tax filer is found to be ineligible for the tax credit.
Focusing on fraud
Form 8867 has been slightly revised this year to ensure that the credit is going to those who deserve it.
In fact, the IRS is becoming more concerned than ever with overall attempts at fraud — not just those taxpayers who attempt to cheat the government, but from identity thieves who attempt to cheat both the government and innocent taxpayers.
Jennifer Jenkins, an IRS spokesman, said incidents of identity theft and refund fraud are growing rapidly.
About 80 percent of all taxpayers now file electronically, and with that high rate has come more attempts at identity theft.
In 2011 and 2012 combined the IRS detected tax and refund-fraud attempts that totaled $20 billion.
“I think it’s fair to say that ID theft is a growing problem,” Ms. Jenkins said. “Certainly, it is with regard to tax fraud, and specifically, tax refund fraud.”
As a result, the IRS has beefed up its enforcement staff to combat the problem, devoting 1,500 staff members to fight ID theft in 2011, and doubling that to 3,000 staffers in 2012 and creating a new Identity Protection Specialized Unit.
“We have increased our [computer] filters we used for returns that offer better ways to check for fraud,” Ms. Jenkins said.
This year the IRS also has issued over 600,000 identity protection PINs (personal identification numbers) to previous victims of identity theft.
Mr. Mira agreed that identity theft is a growing problem and he’s previously filed tax returns electronically for clients only to have the returns rejected because someone already had filed a return using the client’s social security number.